Chancellor defends OBR against downgrade critics

8th December 2011

The OBR has just downgraded its forecasts for 2011, 2012 and 2013 and said total output in the economy would now be expected to be 3.5% lower in 2016 than it had forecast at the time of March's Budget representing a huge£65bn gap.

But as the BBC reports, the OBR chief Robert Chote has defended the downgrade and the organisation's methodology and credibility.

Chote, speaking to MPs on the Treasury select committee said that change was based on "accumulating evidence that since the recession ended output growth has been weaker than we would have anticipated back in March".

"The decision to change is based on the evidence that has come in. The puzzle is try to explain why the evidence shows what the evidence does."

The Chancellor George Osborne, who of course, set up the organisation, told the committee: "I have created the OBR in order to give Government, Parliament and the country the best independent estimate of what is happening to the British economy and what will happen to it in the future. I am not annoyed it downgraded forecasts. Forecasting is never going to be something you get 100 per cent right, it is impossible."

However, the Chancellor has come under fire from other economists for relying on the OBR when formulating government policy.

Earlier in the week, as Money Marketing reports, Roger Bootle founder of Capital Economics, said: "There is no certainty at all in the OBR's projections. Forecasting is extremely difficult at the best of times and we are at a particularly difficult juncture at the moment. It is not so much the OBR has not got things right that is worth noting, but the question to what extent should anyone be basing policy on what the OBR or indeed what anyone else, is forecasting?"

He said another downgrade could undermine the whole credibility of the new office.

The Telegraph reporting on the issue also quoted Jonathan Portes, director of the National Institute of Economic & Social Research (NIESR). However he set his view within an overall critique of government policies. saying he noted that "the OBR's view of potential output is now somewhat more pessimistic than NIESR's". Portes believes that the Chancellor has set the wrong fiscal mandate, because promising to eliminate the structural deficit over a rolling five-year horizon "does not ensure long-run sustainability".

But some on the Telegraph message boards have sprung to Chote's defence.

clandulla writes: "Come on! The head of the OBR and former head of the IFS, Robert Chote, is a highly respected economist and a man of the highest integrity. To suggest the OBR be shut down because they under-estimated the severity of the current economic situation, i.e., they didn't foresee the depth of the eurozone crisis, is just plain silly. Is there more to Roger Bootle's suggestion than meets the eye?"

And Paul Scott adds: "In fairness to the OBR, it has been external events in the Eurozone which have completely changed the economic outlook pretty much everywhere in Europe. UK growth has fallen back in line with similar falls in France, Germany, and of course the Southern area is in Recession. Talk to any businessman, and they will tell you that customers are sitting on purchasing decisions, waiting to see what happens with the Eurozone crisis first, before they commit.